You are trying to estimate the beta of a private firm that manufactures home appliances. You have managed to obtain betas for publicly traded firms that also manufacture home appliances.
|
Firm |
Beta |
Debt |
MV of Equity |
|
Black & Decker |
1.4 |
$ 2,500 |
$ 3,000 |
|
Fedders Corp. |
1.2 |
$ 5 |
$ 200 |
|
Maytag Corp. |
1.2 |
$ 540 |
$ 2250 |
|
National Presto |
0.7 |
$ 8 |
$ 300 |
|
Whirlpool |
1.5 |
$ 2900 |
$ 4000 |
The private firm has a debt equity ratio of 25%, and faces a tax rate of 40%. The publicly traded firms all have marginal tax rates of 40% as well.
a. Estimate the beta for the private firm.
b. What concerns, if any, would you have about using betas of comparable firms?